The Netherlands and Latvia: Directors in the twilight zone
An international comparison of INSOL International, including trends in the Netherlands and Latvia.
Last year INSOL International, whose members specialize in turnaround and insolvency, published the fifth edition of a comparative study on the risks for company directors, managers, advisors and other third parties acting during the so-called 'twilight zone', that might even precede the insolvency of company. After considering thirty jurisdictions the study is prudent to conclude that over the recent years, director liabilities have been increasingly sharpened, the risks have been increased and there is an abiding attention to duties and responsibilities.
In general these conclusions correspond with Dutch trends relating to director liabilities. In terms of legal certainty, however, it remains difficult to pinpoint exactly which behavior may lead to liability and which circumstances may lead to exculpation. Moreover, Dutch law does not actually constitute which period of time qualifies as 'the twilight zone'. Judges have to decide at what point in time directors had to realize that company creditors would be disadvantaged. From that moment onwards, a director should explicitly consider the creditors' interests. Depending upon the type of action that is brought to the court, it is again up to the judge to decide whether a director has properly performed his duty, taking all relevant circumstances into consideration. The judge might even be confronted with having to decide if the defendant actually qualifies as a director. Nonetheless, Dutch case law shows an increasing number of cases relating to director liability. More and more individual creditors seem to direct their attention to company directors and even controlling shareholders, accusing them of mismanagement or not taking the necessary steps to prevent (disproportionate) prejudice to creditors. This trend might even be part of a much broader development in Dutch liability law, which boils down to the idea that fate no longer plays a (significant) part when it comes to damages: 'another (legal) person was responsible and can offer compensation for my losses'.
The study's conclusion is also consistent with recent developments in Latvia. The general principle of director’s liability under Latvian law is that directors are jointly and severally liable for any damages caused to the company. One of the only defences that is available to a director is to prove that the director has acted as “an honest and careful manager”. This concept has been deliberately left undefined as each dispute is reviewed on a case-by-case basis, although as a guideline the person should have acted in good faith and with reasonable care. This liability was, however, limited by time-barring claims against a director once five years have passed counting from the day when the director has caused damages to the company. Recently, the Supreme Court of Latvia, has expanded the principle of director’s liability, by stating that a director can be personally liable for any tax debts (including any possible interest and/or fines for late payment) of the company. Also, during insolvency proceedings, the management board members can now be jointly and severally liable to all creditors in the amount of the principal debt that cannot be satisfied within the scope of the insolvency proceedings if, in short, the management board members for failing the requirement to keep (financial) records or to provide bankruptcy trustee with those records. A similar assessment of the director's performance of his duties applies in the Netherlands.
For both jurisdictions it remains to be seen whether director liability will become the new standard in company law instead of being the exception to the rule.
Loze & Partners
Jeffrey van Nuland
Boels Zanders Advocaten
Venlo, the Netherlands
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